Decades of creative accounting at state-owned Sabah Development Bank (SDBank) hid losses through non-performing loans (NPLs) amounting to over RM5bil. This was stated by Sabah’s Finance Minister. In a detailed and stunning disclosure at the state assembly on July 10, Masidi said the NPLs made up 75% of the total RM6.6bil loans issued by the bank as of May 2024. Apart from creative accounting by providing fresh loans to borrowers to cover up their NPLs, there had been a total management meltdown in checks and balances for approving loans to unqualified companies. SDBank has been giving out loans to borrowers, and when the borrowers were unable to pay, creative accounting was applied. New loans are created to pay for the overdue repayments so that these loans would not go into the non-performing category.
The new loan principal and interest overdue from borrowers on paper made it appear as though the original amount had been repaid and "collection" was done with the interest owed showing as "income earned" in the bank's books. The NPL numbers are reduced as these loans are now seen to be performing.
Loans dated back to 2003 and the previous management of the bank were able to report profits to the tune of RM580mil over the past six years through this "creative accounting". SDBank has raised funds by borrowing from the bond market. Actual cash collection by SDBank has not been sufficient to cover the bond repayment due and the bank then borrowed more to meet the bond repayment that resulted in ballooning its debt.
The new SDB board and management that took over in July 2023 are now carrying out a rigorous review of security assets. The Sabah Finance Ministry (MOF) however, has expressed strong support for the SDBank, emphasising that the bank’s RM5 bil in non-performing loans (NPLs) are secure and recoverable.
The state government plans to bolster the bank by encouraging government-linked companies (GLCs) to repay loans and deposit excess funds as fixed deposits. Another important financial support is the conversion of the state’s deposits of RM660 million to redeemable preference shares over the next few years to strengthen the bank’s capitalisation. Since the new board took over in 2023, GLC loan exposure has decreased from RM2.2 bil in July 2023 to RM0.7 bil, and bond obligations have reduced from RM5.0 bil to RM3.9 bil.
The bank has adopted industry practices and Bank Negara Malaysia (BNM) guidelines and has set an aggressive target to recover RM1 bil in NPLs annually over the next three years. The development bank plans to exit the Peninsular Malaysia market by then, where it approved approximately RM8 bil in loans between 2003 and 2018, primarily for property development in Kuala Lumpur, Selangor, and Johor. The bank will now focus exclusively on projects within Sabah that are economically, socially, and environmentally responsible.
Integrity at the top is key in any organisation, especially for a bank. The “creative accounting” strategy could be a good case study for a business school!
References:
SDBank hid RM5bil in bad loans through creative accounting, says Masidi, Muguntan Vanar and Sandra Sokial, The Star, 10 July 2024
Sabah MOF backs development bank amid RM5b NPLs, Eynez Syazmeena, Focus Malaysia, 12 July 2024
No comments:
Post a Comment